Sunday, August 3, 2014

Hutchison on the Socialist Calculation Debate

“As regards the debate on socialism, it may be worth observing, first, that the question as to how a socialist economy would, or could, achieve a more or less ‘efficient’ allocation of resources did not originate with the Austrian school, but with German historical economists, including even, in a rather jocular passage, Friedrich Engels (v. Hutchison, 1953, pp. 293–8; and 1981, pp. 14–16). Mises certainly deserves credit, however, for raising the issue so sharply in 1920. But the argument he employed was seriously exaggerated and oversimplified. Intermittently, underlying his argument is the extreme rationalist assumption of what Kirzner, rather misleadingly, calls ‘static individualism’, and also, of course, of so much economic theorizing since Ricardo of generally full, or even perfect knowledge. It is just too facile to demonstrate that socialist planners may not be able to improve on the allocation of competitive markets if everybody in those markets—more or less by definition—is equipped with full or perfect knowledge. At one point, for example, Mises raised the question of how a ‘socialist commonwealth’ would decide about investing in a new railway line. He explains that ‘under a system of private ownership we could use money calculations to decide these questions’ (1969, p. 104). Certainly ‘money calculations’ could be used, but they would not lead to correct or even efficient decisions without adequate knowledge on the part of the calculators. In fact, the Austro-nihilist wing, of the modern Austrian movement, led by Lachmann and Shackle, insisted that total unpredictability made any kind of economic ‘calculation’ (capitalist or socialist) impossible in any case. Mises, in fact, also failed to recall that it was precisely in the area of railway investment, in the pristine heyday of free-market capitalism in Britain, that some of the most immense and disastrous miscalculations had been perpetrated which plunged the whole economy into years of depression, bringing intense suffering to the poorest in the community (see Hutchison, 1938, p. 186).” (Hutchison 1994: 225–226).

There are three interesting points here:

(1) Mises was not the originator of a critique of planning in command economies in the socialist calculation debate, but the German historical school economists apparently were;

(2) Mises’ belief that a market economy achieves superior economic calculation depends on the assumption of a strong tendency to market clearing and that in turn implies the unrealistic assumption of “full or perfect knowledge” (or least something close to it!).

(3) even within the Austrian school, the wing following Ludwig Lachmann apparently argued that radical uncertainty threw up problems for “economic calculation” as defined by Mises in either a capitalist or socialist economy.

I don't think that Mises assumes "“full or perfect knowledge". Do you have any evidence to back up that claim ?

His case for economic calculation rests on the view that entrepreneurs can use current prices and their own expectations of future trends to identify good investment opportunities. In a non-market economy (he argues) there is no way for these prices to be set. This has nothing to do with "perfect knowledge" of market participants.

Of course, the point that you need money prices to calculate profit and losses and that eliminating money was a socialist fantasy is well taken.

But, as I recall, a number of the early socialist opponents of Mises conceded that command economies would still use money prices: even Hayek says this in Socialism and War: Essays, Documents, Reviews (ed. Bruce Caldwell). Routledge, London, 1997, p. 9.

Yes, I remember reading George Akerlof and Robert J. Shiller's book Animal Spirits: How Human Psychology Drives the Economy (2009) a few years ago. It was generally a good book, though it still has a New Keynesian foundation.

"War experience in the organisation of socialised production has left some near observers optimistically anxious to repeat it in peace conditions. War socialism unquestionably achieved a production of wealth on a scale far greater than we ever knew in peace, for though the goods and services delivered were destined for immediate and fruitless extinction, none the less they were wealth. Nevertheless, the dissipation of effort was also prodigious, and the atmosphere of waste and not counting the cost was disgusting to any thrifty or provident spirit."

the flat-line period coincides pretty closely with the Bretton Woods system, which makes me wonder whether such financial stability is possible under a system of floating exchange rates and high capital mobility, or whether you need a managed exchange rate system with capital controls.

Minsky's argument was that this was due to the high amount of government debt held by the banking system after the war. This makes that period somewhat of a special case, even if the policy framework was unchanged.

It's absolutely false that the Austrians do or must assume perfect knowledge. Only someone who has never carefully read Mises and Hayek could make such a claim. Austrians, in fact, are among the biggest *critics* of that assumption. See for example Hayek's seminal 1937 paper "Economics and Knowledge", where his central theme is to attack the very idea that knowledge is 'given'.